2023 (3) TMI 711 - AT - Income Tax

Existence of a PE in India - Profit attribution - CIT-A held that CIS did not constitutes a dependent agent PE of the appellant in Indian and does not have a service PE but sustained the fix placed PE in India and that assessee has business connection in India to be covered under the provisions of Section 9 of the Act - HELD THAT - The issue of holding fixed place permanent establishment of the assessee in India, in assessee s own case the Tribunal for assessment year 2013-14 2020 (11) TMI 1101 - ITAT DELHI and 2014-15 2023 (1) TMI 1234 - ITAT DELHI has upheld the following findings of Ld. CIT(A) wherein on the proposition of PE deserves to be upheld. The employees of the assessee frequently visited the premises of CIS to provide supervision, direction and control over the operations of CIS and such employees had a fixed place of business at their disposal. CIS was practically the projection of assessee s business in India and carried out its business under the control and guidance of the assessee and without assuming any significant risk in relation to such functions. Besides assessee has also provided certain hardware and software assets on free of cost basis to CIS. Thus, the findings of the CIT(A) that assessee has a fixed place PE in India Article 5(1) of the DTAA is upheld. Decided against assessee. Dependent agent PE - Business model of the Appellant and in absence of any material on record that the conditions mentioned in Article 5(4) of the DTAA is satisfied viz. habitually exercising authority to conclude contracts or maintaining stock of goods or habitually securing orders. CIS did not constitute a dependent agent PE of the Appellant in India. Payment link charges / IPLC charges being taxable under royalty - We hold that there is no transfer of the right to use, either to the assessee or to CIS. The assessee has merely procured a service and provided the same to CIS, no part of equipment was leased out to CIS. Even otherwise, the payment is in the nature of reimbursement of expenses and accordingly not taxable in the hands of the assessee. Therefore, it is held, that the said payments do not constitute Royalty under the provisions of Article 12 of the tax treaty and the ground is allowed in favour of assessee.

Issues Involved:
1. Whether M/s. Convergys India Services Pvt. Ltd. (CIS) constitutes a Permanent Establishment (PE) of the assessee in India.
2. Profit attribution to the said PE.
3. Taxability of IPLC charges received by the assessee in India.
4. Existence of Dependent Agent PE in India.
5. Existence of Service PE in India.

Issue-Wise Detailed Analysis:

1. Permanent Establishment (PE) of the Assessee in India:
The primary issue was whether CIS constitutes a PE of the assessee in India. The Tribunal upheld the findings of the CIT(A) and previous Tribunal orders, concluding that the assessee has a fixed place PE in India. The Tribunal noted, "The employees of the assessee frequently visited the premises of CIS to provide supervision, direction and control over the operations of CIS and such employees had a fixed place of business at their disposal." Therefore, CIS was considered a projection of the assessee's business in India, carrying out business under the control and guidance of the assessee without assuming significant risk. Consequently, the Tribunal upheld the CIT(A)'s decision that the assessee has a fixed place PE in India under Article 5(1) of the DTAA.

2. Profit Attribution to the PE:
The Tribunal directed the AO to follow the methodology laid down in previous years for profit attribution. The CIT(A) had provided a detailed step-by-step methodology for computing the profits attributable to the PE, which included computing the global operating income percentage, applying it to the end-customer revenue, and reducing the profit before tax of CIS. The Tribunal restored the issue to the file of the AO for computing the attribution of profits with respect to the fixed place PE, following the methodology from previous years.

3. Taxability of IPLC Charges:
The Tribunal ruled in favor of the assessee, holding that IPLC charges are not taxable as royalty in India. The CIT(A) had followed the Hon'ble IT Jurisdictional High Court's decision in New Skies Satellite BV, stating, "the amendment in section 9 will not affect DTAA." Therefore, the payment of link charges received by the appellant from CIS would not qualify as "process" royalty under Article 12 of the India-US DTAA.

4. Existence of Dependent Agent PE in India:
The Tribunal dismissed the department's appeal on the issue of Dependent Agent PE, following the decision in the assessee's own case for earlier assessment years. The CIT(A) had concluded that CIS did not constitute a dependent agent PE of the appellant in India, as there was no material on record to show that the conditions mentioned in Article 5(4) of the DTAA were satisfied, such as habitually exercising authority to conclude contracts or securing orders.

5. Existence of Service PE in India:
The Tribunal also dismissed the department's appeal regarding the existence of a Service PE in India. The CIT(A) had noted that the AO had accepted the returned position and taxed the amount as Fee for Included Services under Article 12 of the DTAA. The CIT(A) observed that there was no Service PE in India, as the personnel of the company visited India for rendering services that qualified as Fee for Included Services, which were already taxed accordingly.

Conclusion:
The Tribunal dismissed the revenue's appeal and partly allowed the assessee's appeal with consequential effects as per the directions provided. The Tribunal's decision was consistent with previous rulings in the assessee's own case, emphasizing judicial discipline and the principle of consistency. The order was pronounced in the open court on 6th March 2023.

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